ch09 beams10e sm

Chapter 9

INDIRECT AND MUTUAL HOLDINGS

Answers to Questions

1 An indirect holding of the stock of an affiliated company gives the investor an ability to control or significantly influence the decisions of an investee not directly owned through an investee that is directly owned. Two primary types of indirect ownership situations are the father-son-grandson relationship and the connecting affiliates relationship.

2 No. Only 40 percent of T’s stock is held within the affiliation structure and P owns indirectly only 24 percent (60% ´ 40%) of T. T should be included as an equity investment in the consolidated statements of P Company and Subsidiaries.

3a Father-son-grandson b Connecting affiliates

Controlling stockholdersDirect ownership, 70% interest in Y. Indirect ownership, 42% interest in Z (70% ´ 60%).

Controlling stockholdersDirect ownership, 30% interest in B and 70% interest in A. Indirect ownership, 21% interest in B (70% ´ 30%)

Noncontrolling stockholdersDirect ownership, 30% interest in Y and 40% interest in Z. Indirect ownership, 18% interest in Z (30% ´ 60%).

Noncontrolling stockholdersDirect ownership, 30% interest in A and 40% interest in B. Indirect ownership, 9% interest in B (30% ´ 30%).

4 An indirect holding involves the ability of one corporation to control another corporation by virtue of its control over one or more other corporations. A mutual holding affiliation structure is a special type of indirect holding where affiliates indirectly own themselves.

5 The parent’s direct and indirect ownership of Subsidiary B is 49 percent (70% ´ 70%). However, consolidation of Subsidiary B is still appropriate because 70 percent of B’s stock is held within the affiliation structure and only 30 percent is held by the noncontrolling stockholders of B.

© 2009 Pearson Education, Inc. publishing as Prentice Hall9-1

9-2 Indirect and Mutual Holdings

6 Approach A

Combined separate earnings of Pat, Sam, and Stan ($100,000 + $80,000 + $50,000) $230,000Less: Noncontrolling interest share computed as follows:

Direct noncontrolling interest in Stan’s income ($50,000 ´ 30%) (15,000)

Indirect noncontrolling interest in Stan’s income ($50,000 ´ 70% ´ 20%) (7,000)Direct noncontrolling interest in Sam’s income

($80,000 ´ 20%) (16,000 )Pat’s net income and consolidated net income $192,000

Approach B Pat Sam Stan

Separate earnings $100,000 $80,000 $50,000Allocate Stan’s income to Sam ($50,000 ´ 70%) + 35,000 -35,000Allocate Sam’s income to Pat ($115,000 ´ 80%) + 92,000 -92,000 0 Consolidated net income $192,000Noncontrolling interest share $ 23,000 $15,000

7 When the schedule approach for allocating income is used, investment income from the lowest subsidiary must be added to the separate income of the next subsidiary to determine that subsidiary’s net income before it can be allocated to the next subsidiary, and so on.

8 P S1 80% S2 70%Separate earnings $20,000 $10,000 $5,000Deduct: Unrealized profit - 1,000

Separate realized earnings 20,000 9,000 5,000Allocate S2’s income + 3,500 -3,500Allocate S1’s income +10,000 -10,000 0 P’s net income $30,000Noncontrolling int. share $ 2,500 $1,500

S1’s investment in S2 account was not adjusted for the unrealized profits because this would create a disparity between S1’s investment in S2 account and S1’s share of S2’s equity.

9 A mutual holding situation exists because two affiliated companies hold ownership interests in each other.

10 The treasury stock approach considers parent company stock held by a subsidiary to be treasury stock of the consolidated entity. Accordingly, the subsidiary investment account is maintained on a cost basis and is deducted at cost from stockholders’ equity in the consolidated balance sheet.

© 2009 Pearson Education, Inc. publishing as Prentice Hall

Chapter 9 9-3

11 In situations in which a subsidiary holds stock in the parent, both the conventional and treasury stock approaches are acceptable, but they do not result in equivalent consolidated financial statements. The consolidated retained earnings and noncontrolling interest amounts will usually be different because of different amounts of investment income. The treasury stock approach is not applicable when the mutually held stock involves subsidiaries holding the stock of each other.

12 No. Parent company dividends paid to the subsidiary are eliminated.

13 The theory is that parent company stock purchased by a subsidiary is, in effect, returned to the parent company and constructively retired. By recording the constructive retirement of the parent company stock on parent company books, parent company equity will reflect the equity of stockholders outside the consolidated entity. Also, recording the constructive retirement, by reducing parent company stock and retained earnings to reflect amounts applicable to controlling stockholders outside the consolidated entity, will establish consistency between capital stock and retained earnings for the parent’s outside stockholders and parent company net income, dividends, and earnings per share which also relate to the outside stockholders of the parent.

14 Consolidated net income is computed as follows:

P = $50,000 + .8SS = $20,000 + .1PP = $50,000 + .8($20,000 + .1P)P = $71,739Consolidated net income = $71,739 ´ 90% = $64,565

15 For eliminating the effect of mutually held parent company stock, two generally accepted approaches are used—the treasury stock approach and the traditional approach. But when the mutually held stock involves subsidiaries holding stock of each other, the treasury stock approach is not applicable.

16 By adding beginning noncontrolling interest and noncontrolling interest share (determined by multiplying the company’s net income by the noncontrolling interest percentage) and subtracting the noncontrolling interest’s percentage of dividends, the noncontrolling interest can be determined without use of simultaneous equations.

SOLUTIONS TO EXERCISES

Solution E9-1

Pent Sal Terp Separate earnings of the three affiliates (in thousands) $ 800 $500 $200Add: Dividend income from Sal’s investment in Wint accounted for by the cost method ($100,000 ´ 15%) 15Allocate 60% of Terp’s earnings 120 (120)Allocate 60% of Sal’s earnings 381 (381)Consolidated net income – Contr. Share $1,181Noncontrolling interest share $254 $ 80



Solution E9-2Pumba Corporation and Subsidiaries

Income Allocation Schedulefor the year 2009(in thousands)

Pumba Simba Timon Separate earnings or loss $400 $150 $(200)Allocate Simba’s income:

to Pumba ($150,000 ´ 60%) 90 (90)to Timon ($150,000 ´ 20%) (30) 30

Allocate Timon’s loss:to Pumba $(170,000) ´ 80% (136) 136

Consolidated net income – Contr. Share $354 Noncontrolling interest share $ 30 $ (34)

Solution E9-3Place Corporation and Subsidiaries

Income Allocation Schedulefor the year 2009

Place Lake Marsh Separate incomes $200,000 $80,000 $ 70,000Less: Unrealized profit on land (20,000)Separate realized incomes 200,000 60,000 70,000Allocate Lake’s income

60% to Place 36,000 (36,000)20% to Marsh (12,000) 12,000

Allocate Marsh’s income70% to Place 57,400 (57,400)

Consolidated net income – Contr. Share $293,400Noncontrolling interest share $12,000 $ 24,600

Solution E9-4

1 cIncome from Seron is equal to:

70% of Seron’s $160,000 income $112,00070% of Seron’s 80% interest in Trane’s $100,000 income 56,000

Income from Seron $168,000

2 dNoncontrolling interest share is equal to:

30% direct noncontrolling interest in Seron’s $160,000 income $ 48,00020% direct noncontrolling interest in Trane’s $100,000 income 20,00030% ´ 80% indirect noncontrolling interest in Trane’s $100,000 income 24,000

Total noncontrolling interest $ 92,000


Chapter 9 9-5

Solution E9-4 (continued)

3 dConsolidated net income is equal to:Combined separate incomes of $360,000 + $160,000 + $100,000 $620,000Less: Noncontrolling interest share 92,000 Controlling interest share of Consolidated net income $528,000

Alternative computation: Paine’s separate income $360,000Add: 70% of Seron’s $160,000 income 112,000Add: (70% ´ 80%) of Trane’s $100,000 income 56,000 Controlling interest share of Consolidated net income $528,000

Solution E9-5

Pal Sal Tall Ulti Val Separate earnings $ 50,000 $30,000 $35,000 $(20,000) $40,000Less: Unrealized profit - 5,000Separate realized earnings 50,000 30,000 30,000 (20,000) 40,000Allocate Val’s income

70% to Tall +28,000 - 28,000Allocate Ulti’s income

10% to Tall - 2,000 + 2,00060% to Sal -12,000 + 12,000

Allocate Tall’s income80% to Pal + 44,800 -44,80010% to Sal + 5,600 - 5,600

Allocate Sal’s income80% to Pal + 18,880 -18,880

Pal’s net income (or consolidated net income) $113,680Noncontrolling interest share $ 4,720 $ 5,600 $ (6,000) $12,000



Solution E9-6

Pete Mike Nina Ople Separate earnings $ 65,000 $18,000 $28,000 $9,000Unrealized profit - 4,000 + 2,000 -4,000Separate realized earnings 65,000 14,000 30,000 5,000Allocate Ople’s income

20% to Nina + 1,000 -1,00070% to Mike + 3,500 -3,500

Allocate Nina’s income70% to Pete + 21,700 -21,70010% to Mike + 3,100 - 3,100

Allocate Mike’s income90% to Pete + 18,540 -18,540

Pete’s net income (or Controlling share of NI) $105,240Noncontrolling interest share $ 2,060 $ 6,200 $ 500

Alternative solution

NoncontrollingReported + Adjusted Consolidated InterestIncome - Adjustments = Income - Net Income = Share

Pete $65,000 $ 65,000 $ 65,000 0

Mike 18,000 - $4,000 14,000a 12,600 $1,400

Nina 28,000 + 2,000 30,000b 23,700 6,300

Ople 9,000 - 4,000 5,000 c 3,940 1,060

$114,000 $105,240 $8,760

a $14,000 divided 90% to consolidated net income (CNI)10% to noncontrolling interest share (MIE)

b $30,000 divided 70% + (90% ´ 10%) to CNI and 20% + (10% ´ 10%) to MIEc $5,000 divided (90% ´ 70%) + (70% ´ 20%) + (90% ´ 10% ´ 20%) to CNI [78.8%]

and 10% + (10% ´ 10% ´ 20%) + (20% ´ 20%) + (10% ´ 70%) to MIE [21.2%]


Chapter 9 9-7

Solution E9-7

1 bSeparate income of Torry $200,000Included in consolidated net income (.9 ´ .7 ´ $200,000) (126,000)

$ 74,000Alternative solutionDirect noncontrolling interest (.3 ´ $200,000) $ 60,000Indirect noncontrolling interest (.1 ´ .7 ´ $200,000) 14,000

$ 74,000

2 aSeparate income = net income of Vance $120,000Noncontrolling interest (direct) 20 %

$ 24,000

3 cTotal separate incomes $1,065,000Less: Consolidated net income

Pantela $620,000 ´ 100% $620,000Sincock $175,000 ´ 90% 157,500Torry $200,000 ´ 90% ´ 70% 126,000Unger $(50,000) ´ 90% ´ 60% (27,000)Vance $120,000 ´ 90% ´ 80% 86,400 (962,900 )

Total noncontrolling interest share $ 102,100

Alternative solutionSincock $175,000 ´ 10% $ 17,500Torry $200,000 ´ 37% 74,000Unger $(50,000) ´ 46% (23,000)Vance $120,000 ´ 28% 33,600

Total noncontrolling interest share $ 102,100

4 a[See computations for question 3]

5 dNet income of Sincock

Separate income $ 175,000Add: 70% of Torry’s $200,000 140,000Deduct: 60% of Unger’s $(50,000) (30,000)Add: 80% of Vance’s $120,000 96,000

Net income of Sincock $ 381,000Pantela’s interest 90 %

Investment increase 342,900Less: Dividends received from Sincock ($100,000 ´ 90%) (90,000 )

Net increase $ 252,900



Solution E9-8

Affiliation diagram

1 bSeparate income of Savoy (net income) $ 80,000Separate income of Trent $40,000 - ($80,000 ´ 10%) 32,000Separate income of Pasko $240,000 - ($40,000 ´ 70%) - ($80,000 ´ 80%) 148,000 Total separate income $260,000

2 d Pasko Savoy Trent

Separate income $148,000 $80,000 $32,000Unrealized profit on inventory (10,000)Unrealized profit on land (15,000 )Separate realized income $148,000 $70,000 $17,000

3 aPasko’s separate income $148,000Add: Investment income from Savoy ($70,000 ´ 80%) 56,000Add: Investment income from Trent [$17,000 + ($70,000 ´ 10%)] ´ 70% 16,800 Parent’s income (consolidated net income) $220,800

4 dTotal separate realized income $235,000Less: Consolidated net income 220,800

Noncontrolling interest share $ 14,200

Alternative solutionDirect noncontrolling interest in Savoy ($70,000

´ .1)$ 7,000

Indirect noncontrolling interest in Savoy ($70,000 ´ .3 ´ .1) 2,100Direct noncontrolling interest in Trent ($17,000

´ .3) 5,100

Noncontrolling interest share $ 14,200

Solution E9-9

Consolidated net incomeP = Income of Pant on a consolidated basis (including mutual income)

S = Income of Solo on a consolidated basis (including mutual income) P = Separate income of $3,000,000 + 80% of S S = Separate income of $1,500,000 + 30% of P P = $3,000,000 + .8($1,500,000 + .3P) = $3,000,000 + $1,200,000 + .24P.76P = $4,200,000


Chapter 9 9-9

P = $5,526,316Consolidated net income = $5,526,316 ´ 70% = $3,868,421



Solution E9-10

1 Affiliation diagram

2 P = Packard’s income on a consolidated basisS = Smedley’s income on a consolidated basisT = Tweed’s income on a consolidated basis

P = $200,000 + .7SS = $120,000 + .8TT = $80,000 + .1S

Solve for SS = $120,000 + .8($80,000 + .1S)S = $184,000 + .08SS = $200,000

Compute P and TP = $200,000 + .7($200,000)P = $340,000

T = $80,000 + .1($200,000)T = $100,000

Income AllocationConsolidated net income (equal to P) $340,000Noncontrolling interest share in Smedley ($200,000 ´ 20%) 40,000Noncontrolling interest share in Tweed ($100,000 ´ 20%) 20,000

Total income $400,000


Chapter 9 9-11

Solution E9-11 [AICPA adapted]

1 b

2 b

3 d

4 c

Supporting computations

A = Akron’s income on a consolidated basisB = Benson’s income on a consolidated basisC = Cashin’s income on a consolidated basis

A = $190,000 + .8B + .7CB = $170,000 + .15CC = $230,000 + .25A

Solve for AA = $190,000 + .8[$170,000 + .15($230,000 + .25A)] + .7($230,000 + .25A)A = $190,000 + $136,000 + $27,600 + .03A + $161,000 + .175AA = $514,600 + .205A.795A = $514,600A = $647,295.59

Determine CC = $230,000 + .25($647,295.59)C = $391,823.90

Determine BB = $170,000 + .15($391,823.90)B = $228,773.58

Allocate income to consolidated net income and noncontrolling interest

Consolidated net income ($647,295.59 ´ 75%) $485,471.69Noncontrolling interest — Benson ($228,773.58 ´ 20%) 45,754.72Noncontrolling interest — Cashin ($391,823.90 ´ 15%) 58,773.59 Total income $590,000.00



Solution E9-12

1 dCombined separate income $160,000Less: Noncontrolling interest share 6,750 Consolidated net income $153,250

Alternatively:Petty’s separate income $100,000Add: Soma’s net income of $67,500 ´ 90% 60,750Less: Dividends received from Petty ($50,000 ´ 15%) (7,500 )Controlling interest share of Consolidated net income $153,250

2 b P = $100,000 + .9($60,000 + .15P).865P = $154,000 P = $178,035 S = $60,000 + $26,705 = $86,705

Consolidated net income = $178,035 ´ .85 = $151,330Noncontrolling interest share = $86,705 ´ .10 = 8,670 Total income $160,000

Solution E9-13

Pusan Skagg TaborSeparate earnings $50,000 $42,000 $20,000Intercompany profit 3,000

(5,000 ) Separate realized earnings $50,000 $40,000 $20,000

P = Pusan’s income on a consolidated basisS = Skagg’s income on a consolidated basisT = Tabor’s income on a consolidated basis

P = $50,000 + .8SS = $40,000 + .9TT = $20,000 + .1P + .1S

Solve for TT = $20,000 + .1($50,000 + .8S) + .1($40,000 + .9T)T = $20,000 + $5,000 + .08($40,000 + .9T) + $4,000 + .09TT = $25,000 + $3,200 + .072T + $4,000 + .09T.838T = $32,200T = $38,424.82S = $40,000 + .9($38,424.82)S = $40,000 + $34,582.34S = $74,582.34P = $50,000 + .8($74,582.34)P = $50,000 + $59,665.87P = $109,665.87

Consolidated net income ($109,665.87 ´ .9) $ 98,699.28Noncontrolling interest share of Skagg ($74,582.34 ´ .1) 7,458.24Noncontrolling interest share of Tabor ($38,424.82 ´ .1) 3,842.48


Chapter 9 9-13

Total income $110,000.00



Solution E9-14

1 Treasury stock approach

Investment in Scat balance December 31, 2009Investment balance December 31, 2008 $245,700Add: Income from Scat 26,900Less: Dividends received from Scat (24,000)Add: Dividends paid to Scat 6,000 Investment in Scat December 31, 2009 $254,600

Supporting computationsComputation of income from Scat:Scat’s separate income $ 50,000Add: Scat’s dividend income from Pumel 6,000 Scat’s net income 56,000Pumel’s ownership interest 70 %Pumel’s equity in Scat’s income 39,200Less: Dividends paid to Scat ($60,000 ´ 10%) (6,000)Less: Excess amortization ($9,000 x 70%) (6,300 )Income from Scat $ 26,900

2 Conventional approach

Pumel’s net income and consolidated net income

P = ($120,000 + .7S) - $6,300 S = $50,000 + .1P

P = $120,000 + .7($50,000 + .1P) - $6,300 P = $120,000 + $35,000 + .07P - $6,300.93P = $148,700 P = $159,892

S = $50,000 + .1($159,892) S = $65,989

Pumel’s net income and consolidated net income ($159,892 ´ 90%) $143,903Noncontrolling interest share ($65,989 ´ 30%) 19,797

Total income $163,700

Income from ScatConsolidated net income $143,903Less: Pumel’s separate income 120,000

Income from Scat $ 23,903

Or alternatively, ($65,989 ´ 70%) - ($159,892 ´ 10%) - $6,300 excess $ 23,903

Investment in Scat December 31, 2009Investment in Scat December 31, 2008 $245,700Add: Income from Scat 23,903Less: Dividends from Scat (21,000 )

Investment in Scat December 31, 2009 $248,603


Chapter 9 9-15

SOLUTIONS TO PROBLEMS

Solution P9-1

Pida Corporation and SubsidiariesSchedule to Compute Consolidated Net Income and Noncontrolling Interest Share

for the year 2009

Pida Staley Axel Bean Separate income (loss) $500,000 $300,000 $150,000 $(20,000)

Less: Unrealized profit (20,000 )

Separate realized income (loss) 500,000 300,000 130,000 (20,000)Allocate Bean’s loss 70% to Staley (14,000) 14,000

Allocate Axel’s income 60% to Staley 78,000 (78,000)Patent (12,000 )

352,000Allocate Staley’s income 90% to Pida 316,800 (316,800)Patent (40,000 )

Controlling share of net income $776,800

Noncontrolling interest income $ 35,200 $ 52,000 $ (6,000)

Check:

Income allocated: $776,800 consolidated net income + $35,200 noncontrolling interest share in Staley + $52,000 noncontrolling interest share in Axel - $6,000 noncontrolling interest share (loss) in Bean = $858,000

Income to allocate: $500,000 Pida income + $300,000 Staley income + $130,000 realized income of Axel - $20,000 loss of Bean - $52,000 patent = $858,000

Controlling share of consolidated net income: $500,000 - $40,000 + 90%($300,000 - $12,000) + (90% ´ 60% ´ $130,000) - (90% ´ 70% ´ $20,000) = $776,800



Solution P9-2

1 Seaton’s books

Investment in Thayer (70%) 147,000Cash 147,000To record purchase of a 70% interest in Thayer Corporation.

Cash 7,000Investment in Thayer (70%) 7,000To record dividends received from Thayer ($10,000 ´ 70%).

Investment in Thayer (70%) 17,500Income from Thayer 17,500To record investment income computed as follows:Share of Thayer’s net income ($30,000 ´ 70%) $ 21,000Less: Unrealized profit from upstream sale of inventory items ($5,000 ´ 70%) (3,500 )

$ 17,500

Posey’s books

Cash 24,000Investment in Seaton (80%) 24,000To record dividends received from Seaton ($30,000 ´ 80%).

Investment in Seaton (80%) 44,000Income from Seaton 44,000To record investment income computed as follows:

Share of Thayer’s net income($50,000 + $17,500) ´ 80% $ 54,000Less: Unrealized gain on land sold to Thayer (10,000 )

$ 44,000


Chapter 9 9-17

Solution P9-2 (Continued)

2 Schedule of income allocation Posey Seaton Thayer

Separate earnings $150,000 $50,000 $30,000Less: Unrealized profits (10,000 ) (5,000 )

Separate realized earnings 140,000 50,000 25,000Allocate Thayer’s realized earnings to Seaton ($25,000 ´ 70%) 17,500 (17,500)

Seaton’s net income 67,500Allocate Seaton’s net income to Posey ($67,500 ´ 80%) 54,000 (54,000)

Posey’s net income and Controlling share of net income $194,000 Noncontrolling interest share $13,500 $ 7,500

Check: Realized earnings ($140,000 + $50,000 + $25,000) $215,000Less: Noncontrolling interest share (13,500+7,500) (21,000 )Controlling share of net income $194,000

3 Schedule of assets and equities at December 31, 2010

Posey Seaton Thayer

Assets $ 924,000 $230,000 $270,000Investment in Seaton (80%) 220,000Investment in Thayer (70%) 157,500

Total assets $1,144,000 $387,500 $270,000

Liabilities $ 150,000 $100,000 $ 50,000Capital stock 600,000 200,000 150,000Retained earnings 394,000 87,500 70,000

Total liabilities and equity $1,144,000 $387,500 $270,000

Note: Posey’s assets other than investments consist of $800,000 assets at the beginning of the year, plus separate earnings of $150,000 and dividend income of $24,000, less dividends paid of $50,000.

Seaton’s assets other than investments consist of $350,000 assets at the beginning of the period, plus separate earnings of $50,000 and dividend income of $7,000, less investment cost of $147,000 and dividends paid of $30,000.



Solution P9-3

Preliminary computations

Check on consolidated net income Pony Star Teel Total

Net income as stated $184,500 $90,000 $25,000 $299,500Less: Investment income (84,500 ) (10,000) (94,500 )Separate income 100,000 80,000 25,000 205,000Add: Unrealized profit in beginning inventory 8,000 8,000Less: Unrealized profit in ending inventory (20,000) (20,000 )Separate realized incomes 108,000 80,000 5,000 193,000Allocate Teel’s income

50% to Pony 2,500 (2,500)40% to Star 2,000 (2,000)

Star’s net income 82,000Allocate Star’s income

80% to Pony 65,600 (65,600)Less: Depreciation on excess allocated to plant and Equipment (5,000) ( 1,250) (6,250 )Total income of consolidated Entity $186,750Controlling share of NI $171,100 171,100Noncontrolling int. share $ 15,150 $ 500 15,650

$186,750

Investment in Star (80%) $420,000

Implied total fair value of Star ($420,000 / 80%) $ 525,000Book value of Star (500,000 )Excess of fair value over book value $ 25,000

Excess allocated to equipment wit a four year lfe Amortization ($25,000 / 4 yrs) $ 6,250

Investment in Teel (50%) $ 75,000

Implied total fair value of Teel ($75,000 / 50%) $ 150,000Book value of Star (120,000 )Excess of fair value over book value – Goodwill $ 30,000


Chapter 9 9-19

Solution P9-3 (continued)

Pony Corporation and SubsidiariesConsolidation Working Papers

for the year ended December 31, 2009

Pony Star Teel Adjustments andEliminations

ConsolidatedStatements

Income StatementSales $500,000 $300,000 $100,000 h 50,000 $ 850,000

Income from Star 72,000 d 72,000

Income from Teel 12,500 10,000 a 22,500

Cost of sales 240,000* 150,000* 60,000* i 20,000 g 8,000h 50,000 412,000*

Other expenses 160,000* 70,000* 15,000* f 6,250 251,250*

Noncont.int.share — Star c 15,150 15,150*

Noncont.int.share — Teel c 500 500*

Cont.int.shareof NI $184,500 $ 90,000 $ 25,000 $ 171,100

Retained Earnings

Retained earnings — Pony $115,500 f 12,500

g 8,000 $ 95,000

Retained earnings — Star 160,000 e 160,000

Retained earnings — Teel 45,000 b 45,000

Net income 184,500ü 90,000ü 25,000ü 171,100

Dividends 80,000* 40,000* 10,000* a 9,000c 9,000d 32,000 80,000*

Retained earnings December 31 $220,000 $210,000 $ 60,000 $ 186,100

Balance SheetCash $ 67,000 $ 36,000 $ 10,000 $ 113,000

Accounts receivable 70,000 50,000 20,000 j 10,000 130,000

Inventories 110,000 75,000 35,000 i 20,000 200,000

Plant and

equipment — net 140,000 425,000 115,000 e 25,000 f 18,750 686,250

Investment in Star 80% 508,000

d 40,000e 468,000

Investment in Teel 50%

95,000 a 7,500b 87,500

Investment in Teel 40%

74,000 a 6,000b 68,000

Goodwill b 30,000 30,000

$990,000 $660,000 $180,000 $1,159,250

Accounts payable $ 70,000 $ 40,000 $ 15,000 j 10,000 $ 115,000

Other liabilities 100,000 10,000 5,000 115,000

Capital stock 600,000 400,000 100,000 b 100,000e 400,000 600,000

Retained earnings 220,000ü 210,000ü 60,000ü 186,100

$990,000 $660,000 $180,000

Noncontrolling interest — Star (beginning) e 117,000

Noncontrolling interest — Teel (beginning) b 19,500

Noncontrolling interest December 31 c 6,650 143,150

$1,159,250* Deduct



Solution P9-4

1 Affiliation diagram

2 Income allocation

DefinitionsP = Parish’s income on a consolidated basisS = Swift’s income on a consolidated basisT = Tolbert’s income on a consolidated basis

EquationsP = $200,000 + .8S + .5TS = $100,000 + .2TT = $50,000 + .1S

Solve for SS = $100,000 + .2($50,000 + .1S)S = $110,000 + .02S.98S = $110,000S = $112,244.90 or $112,245

Compute TT = $50,000 + .1($112,244.90)T = $50,000 + $11,224.49T = $61,224.49 or $61,224

Compute PP = $200,000 + .8($112,244.90) + .5($61,224.49)P = $320,408.16 or $320,408

Income allocationConsolidated net income = P = $320,408Noncontrolling interest share in Swift ($112,245 ´ .1) 11,225Noncontrolling interest share in Tolbert ($61,224 ´ .3) 18,367

$350,000


Chapter 9 9-21


3 P, S, and T are as defined in part 2.

EquationP = ($200,000 - $20,000) + .8S + .5TS = $100,000 + .2TT = ($50,000 - $10,000) + .1S

Solve for SS = $100,000 + .2($40,000 + .1S)S = $108,000 + .02SS = $110,204.08

Compute TT = $40,000 + .1($110,204.08)T = $51,020.41

Compute PP = $180,000 + .8($110,204) + .5($51,020.41)P = $293,673.48

Income allocationConsolidated net income = P = $293,673.48Noncontrolling interest share in Swift ($110,204.08 ´ 10%) 11,020.40Noncontrolling interest share in Tolbert ($51,020.41 ´ 30%) 15,306.12

$320,000.00



Solution P9-5

Working paper entriesa Income from Skill 27,000

Dividend income 10,000Dividends 28,000Investment in Skill 9,000To eliminate income from Skill, dividend income, and 90% of Skill’s dividends, and return the investment in Skill account to the beginning-of-the-period balance under the equity basis.

b Capital stock — Skill 200,000Retained earnings — Skill 200,000Goodwill 50,000

Investment in Skill 405,000Noncontrolling interest — beginning 45,000To eliminate reciprocal investment and equity accounts, and enter beginning-of-the-period patent and noncontrolling interest.

c Treasury stock 80,000Investment in Prill 80,000To reclassify investment in Prill to treasury stock.

d Noncontrolling Interest Share 3,000Dividends 2,000Noncontrolling Interest 1,000To record noncontrolling interest share of subsidiary income and dividends.


Chapter 9 9-23


Treasury Stock approachPrill Company and SubsidiaryConsolidation Working Papers


Prill Skill 90%Adjustments andEliminations


Income StatementSales $ 400,000 $ 100,000 $ 500,000

Income from Skill 27,000 a 27,000

Dividend income 10,000 a 10,000

Cost of sales 200,000* 50,000* 250,000*

Expenses 50,000* 30,000* 80,000 *

Consolidated NI 170,000

Noncontrolling share d 3,000 3,000*

Controlling share of NI $ 177,000 $ 30,000 $ 167,000

Retained Earnings

Retained earnings — Prill $ 300,000 $ 300,000

Retained earnings — Skill $ 200,000 b 200,000

Net income (Controlling share in Consol. Column)

177,000ü 30,000ü 167,000

Dividends 100,000* 20,000* a 28,000d 2,000 90,000*

Retained earnings December 31 $ 377,000 $ 210,000 $ 377,000

Balance SheetOther assets $ 486,000 $ 420,000 $ 906,000

Investment in Skill 90% 414,000 a 9,000b 405,000

Investment in Prill 10% 80,000 c 80,000

Goodwill b 50,000 50,000

$ 900,000 $ 500,000 $ 956,000

Liabilities $ 123,000 $ 90,000 $ 213,000

Capital stock 400,000 200,000 b 200,000 400,000

Retained earnings 377,000ü 210,000ü 377,000

$ 900,000 $ 500,000

Noncontrolling interest January 1 b 45,000

Noncontrolling interest December 31 d 1,000 46,000

Treasury stock c 80,000 80,000*

$ 956,000* Deduct



Solution P9-6

Calculations

Income from ScimpParoll separate income (140,000 - 80,000) $ 60,000Scimp separate income (100,000 + 3,000 - 60,000) $ 43,000

Formula:P income = Adjusted Paroll income + % interest ´ S incomeAdjusted Paroll income = $60,000 + $2,000 delayed gain on land

- $4,000 patent amortization (80%)S income = Scimp income + % interest ´ P incomeP income = $58,000 + 80% ´ ($43,000 + 20% ´ P income)P income = $92,400 + .16 ´ P incomeP income = $110,000S income = $43,000 + 20% ´ $110,000S income = $65,000Controlling share of consolidated net income = P income ´ % outstandingControlling share = $88,000Noncontrolling share = S income ´ % outstandingNoncontrolling share = $12,000 [($65,000 - $5,000 amortiz.) x 20%]Income from Scimp = consolidated income less P separate incomeIncome from Scimp = $28,000 ($88,000-$60,000)

Working paper entriesa Investment in Scimp 2,000

Gain on sale of land 2,000To recognize previously deferred gain on sale of land.

b Dividend income 4,000Investment in Scimp 4,000To eliminate intercompany dividends paid to Scimp

c Income from Scimp 28,000Dividends 16,000Investment in Scimp 12,000To eliminate income from Scimp and 80% of Scimp’s dividends, and return the investment in Scimp account to the beginning-of-the-period balance under the equity basis.

d Investment in Scimp 100,000Investment in Paroll 100,000To eliminate reciprocal investments.

e Capital stock — Scimp 50,000Retained earnings — Scimp 180,000Patent 20,000

Investment in Scimp 195,710Noncontrolling interest — beginning 54,290To eliminate reciprocal investment and equity accounts, and enter beginning-of-the-period patent and noncontrolling interest.

f Expenses 5,000Patent 5,000To record current year’s amortization of patent.

g Noncontrolling Interest Share 12,000


Chapter 9 9-25

Dividends 4,000Noncontrolling Interest 8,000To record the noncontrolling interest share of subsidiary income and dividends.




Prill Company and SubsidiaryConsolidation Working Papers


Paroll Scimp 90%Adjustments andEliminations


Income StatementSales $ 140,000 $ 100,000 $ 240,000

Income from Scimp 28,000 c 28,000

Dividend income 4,000 b 4,000

Gain on sale of land 3,000 a 2,000 5,000

Expenses 80,000* 60,000* f 5,000 145,000 *

Consolidated net income 100,000

Noncontrolling share g 12,000 12,000*

Controlling share of NI $ 88,000 $ 47,000 $ 88,000

Retained Earnings

Retained earnings — Paroll $ 405,710 $ 405,710

Retained earnings — Scimp $ 180,000 e 180,000

Controlling share of NI 88,000ü 47,000ü 88,000

Dividends 16,000* 20,000* c 16,000g 4,000 16,000*

Retained earnings December 31 $ 477,710 $ 207,000 $ 477,710

Balance Sheet

Other assets $ 448,000 $ 157,000 $ 605,000

Investment in Scimp 109,710 a 2,000d 100,000

b 4,000c 12,000e 195,710

Investment in Paroll 100,000 d 100,000

Patent e 20,000 f 5,000 15,000

$ 557,710 $ 257,000 $ 620,000

Capital stock 80,000 50,000 e 50,000 80,000

Retained earnings 477,710ü 207,000ü 477,710

$ 557,710 $ 257,000

Noncontrolling interest January 1 b 54,290

Noncontrolling interest December 31 g 8,000 62,290

$ 620,000* Deduct


Chapter 9 9-27

Solution P9-7

Preliminary Computations

Panco’s investment cost $170,000

Implied total fair value of Stoker ($170,000 / 80%) $212,500Book value of Stoker (200,000)Excess of fair value over book value - Goodwill $ 12,500

1 Consolidated net income and noncontrolling interest share (conventional approach)

DefinitionsP = Panco’s income on a consolidated basisS = Stoco’s income on a consolidated basis

P = $100,000 separate earnings + .8SS = $40,000 separate earnings + .1P

Solve for PP = $100,000 + .8($40,000 + .1P)P = $100,000 + $32,000 + .08PP = $143,478

Compute SS = $40,000 + .1($143,478)S = $54,348

Income allocationConsolidated net income ($143,478 ´ 90% outside ownership) $129,130Noncontrolling interest share ($54,348 ´ 20%) 10,870

Total (separate incomes) $140,000

2 Entries to account for investments on an equity basisPanco’s books

Capital stock 60,000Retained earnings 20,000

Investment in Stoco 80,000To record constructive retirement of 10% of Panco’s stock.

Investment in Stoco (80%) 29,130Income from Stoco 29,130To record income from Stoco computed as follows: 80%($54,348) - 10%($143,478) = $29,130. Alternatively $129,130 - $100,000 separate income = $29,130.

Cash 16,000Investment in Stoco 16,000To record receipt of 80% of Stoco’s dividends.

Investment in Stoco (80%) 5,000



Dividends 5,000To eliminate dividends on stock that was constructively retired and to adjust the investment in Stoco account for the transfer equal to 10% of Panco’s dividends.


Chapter 9 9-29


3 Journal entries on Stoco’s books

Investment in Panco (10%) 80,000Assets 80,000

To record acquisition of a 10% interest in Panco at book value.

Investment in Panco 14,348Income from Panco 14,348

To record 10% of Panco’s $143,478 income on a consolidated basis.

Cash 5,000Investment in Panco (10%) 5,000

To record receipt of dividends from Panco ($50,000 ´ 10%).

4 Net income for 2011 Panco Stoco Separate incomes $100,000 $ 40,000Investment income 29,130 14,348

Net income $129,130 $ 54,348

5 Investment balance December 31, 2011 Panco Stoco Investments beginning of 2011 $208,000 $ 80,000Less: Constructive retirement of Panco’s stock (80,000)Add: Investment income 29,130 14,348Add: Dividends paid to Stoco 5,000Less: Dividends received (16,000 ) (5,000 )

Investment balances December 31, 2011 $146,130 $ 89,348

6 Stockholders’ equity December 31, 2011 Panco Stoco Stockholders’ equity January 1, 2011 $720,000 $250,000Add: Net income 129,130 54,348Less: Dividends (45,000 ) (20,000 ) Stockholders’ equity December 31, 2011 $804,130 $284,348

7 Noncontrolling interest at December 31, 2011Stoco’s equity on a consolidated basis $284,348Noncontrolling interest percentage 20 %

Noncontrolling interest at December 31, 2011 $ 56,870

Alternative solutionNoncontrolling interest January 1, 2011 ($250,000 ´ 20%) $ 50,000Noncontrolling interest share ($54,348 ´ 20%) 10,870Noncontrolling interest dividends (4,000 )

Noncontrolling interest at December 31, 2011 $ 56,870




8 Adjustment and elimination entries

a Income from Panco 14,348Dividends 5,000Investment in Panco 9,348To eliminate investment income and dividends from Panco and return the investment account to its beginning-of-the-period balance.

b Investment in Stoco 80,000Investment in Panco 80,000To eliminate investment in Panco balance and increase the investment in Stoco for the constructive retirement of Panco’s stock that was charged to the investment in Stoco account.

c Dividends 5,000Investment in Stoco 5,000To eliminate dividends.

d Income from Stoco 29,130Dividends 16,000Investment in Stoco 13,130To eliminate income and dividends from Stoco and return the investment in Stoco to its beginning-of-the-period balance.

e Capital stock — Stoco 150,000Retained earnings — Stoco 100,000Patent 12,500

Investment in Stoco 208,000Noncontrolling interest 54,500To eliminate Stoco’s equity account balances and the investment in Stoco, enter beginning-of-the-period patent and noncontrolling interest.

f Noncontrolling interest share 10,870Dividends 4,000Noncontrolling Interest 6,870To record the noncontrolling interest share of subsidiary income and dividends.


ch09 beams10e sm

Documents